Stanley Escudero served
as U.S. Ambassador to Azerbaijan from 1997 to 2000. Before coming
to Azerbaijan, he had assignments in Tajikistan, Uzbekistan,
India and Pakistan. He worked for the U.S. Embassy in Iran from
1971 to 1975 as well as during the Revolution in 1978 and 1979.
After he retired from the State Department in 2000, he and his
wife, Jaye, decided to return and work in the private sector
in Baku. Here Escudero reveals his hopes for Azerbaijan's future:
prosperity, stability and opportunities for foreign investment,
both inside and outside the energy sector.

This is a seminal moment in the development of Azerbaijan. I'm
convinced that this country is standing on the edge of the greatest
boom that it has ever known. I don't see how it can fail to be
successful, if the right kinds of decisions are made, and the
right steps are taken-now.

Azerbaijan, unlike Armenia, can
prosper, maintain stability, become wealthy and benefit from
its oil money even without the return of Nagorno-Karabakh or
its additional occupied territory. Armenia, on the other hand,
cannot develop unless it cooperates with Azerbaijan.
I certainly wouldn't be coming back to Baku if I didn't believe
that Azerbaijan didn't have a prosperous, bright future and that
it is going to become what the President has always stated- a stable country
in which there will be many opportunities for foreign investment,
both inside and outside the energy sector. I hope that the Azerbaijani
people will benefit from this process and from the prosperity
that will come. Naturally, I hope, myself, to be able to contribute
to this process and to benefit from it as well, since I am now
in the private sector.

But my vision for the future of Azerbaijan, as you might suspect,
is really rather similar to that of President Aliyev's. I've
reached the conclusion over the years that the President is right
about a great many things, and certainly he's right about the
way he sees the future of this country.

Left: One of the most dramatic changes in
Baku during the past ten years has been the massive construction
and renovation projects. Here note that the profile of Lenin's
portrait has been scraped off the mosaic tile wall. The white
building in the background (left) is the President's Office.
Photo: Elman Gurbanov

First
of all, Azerbaijan is blessed with large quantities of oil and
gas. AIOC [Azerbaijan International Operating Company] will be
producing in excess of a million barrels a day at peak.

And we haven't even heard yet from a large number of the other
big offshore structures here in Azerbaijan. There are 112 structures
offshore that I know about. How many of them have been drilled?
Eight? Ten? Obviously, the best prospects are being drilled first,
but I recall that the enormous North Sea find was not made until
about the 24th well was drilled. There is still much more exploration
to come in Azerbaijani waters, despite the recent setbacks.

Azerbaijan has a great deal of oil onshore as well. The Soviets
weren't very good oil drillers. As we examine more and more of
their wells, we find that they weren't drilled properly. Among
other things, the cement wasn't poured in correctly, the wrong
kinds of mud were used, and wells were perforated at the wrong
levels. Basically, when they thought they had taken most of the
oil from an onshore field, they were wrong. I believe that there's
a lot more oil onshore in Azerbaijan than people realize.

Multiple Pipelines
Azerbaijan also has the advantage of geography, since East-West
trade routes pass right through it. The possibilities for transportation
of oil and gas out of the Caspian region are staggering. Five
to six million barrels a day at peak, whenever that peak comes,
is not an unrealistic estimate.

There's so much oil in the Kashagan structure (Kazakhstan) that
it will not all be able to flow via the Caspian Pipeline Consortium
[CPC] complex. It will go in many directions. And one of those
directions ultimately will take it to the Sangachal Terminal
(Azerbaijan), where it will join the other pipelines heading
west.

New pipelines will be built and others will be enlarged. The
CPC line, which goes from the giant Tengiz field in Kazakhstan
to the Russian Black Sea port of Novorossiysk, will be enlarged.
The northern system that goes from Baku through Dagestan and
other parts of Russia to Novorossiysk will probably be enlarged.
And the western line that goes from Baku via Tbilisi and down
to the Turkish port of Ceyhan (pronounced "Jeyhan"),
will be enlarged.

Take a pipeline that's built for a million barrels a day: it's
possible to enlarge it somewhat simply by adding more pumping
stations, although eventually the companies may want to build
another line; one Baku-Tbilisi-Jeyhan pipeline won't be enough.

Neighboring Iran
Looking south, no strategic plan for the export of Caspian basin
oil and gas can ignore Iran. This country requires at least 400,000
barrels of oil a day to satisfy its own requirements for its
northern refineries. Iran also has a need for gas, again in the
northern part of the country, as most of the country's oil and
gas sources are located in the south.

It would be cheaper for Iran to bring oil and gas south from
the Caspian region than to build pipelines to move its own oil
and gas north. They could market the oil and gas in northern
Iran and process the oil at large refineries in Rey (near Tehran),
Araz, Tabriz and Isfahan. Iran doesn't actually have to buy the
gas or oil; they could swap it for their own oil or gas in the
Persian Gulf. It would just be a question of negotiating the
relative value of Caspian oil in relation to Iranian oil.

Current U.S. policy opposes the sale of oil and gas to Iran.
But that's not necessarily the best thing for the countries of
the Caspian, which need to decide for themselves whether or not
it's in their own best interests to trade with this large, powerful
and very important southern neighbor.

Of course, the United States has no control over what these nations
do, but it does have some control over the oil companies that
are based in the United States or have large financial exposures
there. International oil companies that have extensive holdings
in the U.S., such as retail gasoline outlets, would naturally
weigh carefully whether or not to be involved with Iran under
these circumstances.

Baku: The Next
Dubai?
Geography is of particular advantage to Baku. In ancient times,
the Silk Road was not just a single route; it was like a mountain
river with many courses that wove in and out together. And Baku
was a nexus for that Silk Road. Most of the routes that crossed
the mountains north of Iran linked in Baku and then branched
out again.

If you think of the Caspian basin as a whole, you see that the
oil and gas reserves are spread around the entire basin, and
that there will need to be some kind of central hub- a center for the administration
of businesses that will establish themselves in the Caspian.
The area will require a center of communication, banking services,
transportation, storage of various types, light manufacturing
and a variety of other services- rather like Dubai.

The city of Baku is uniquely fitted to play all of these roles.
And when you look around the Caspian Sea, what other city is
there-
with the possible exception of Astrakhan- that could take on this role? Baku
has the infrastructure, the opportunities and mindset for change
and ideal geography. I think that within a generation, Baku will
develop into a center much like what Dubai is now.

Dubai is so much more than just a big oil town. It generates
economic development in the non-energy sector and guarantees
economic and political stability for a broad segment of the population.
Dubai is an engine for the development of an indigenous middle
class. And ultimately that is what Azerbaijan needs most.

Growing Prosperity
We're already starting to see signs of economic development in
Azerbaijan. If you travel outside of Baku to the towns and villages
scattered throughout the country, you'll see two, three, sometimes
10 or 20 large residential buildings being constructed on the
outskirts. Azerbaijanis are obviously building these places for
themselves, either because they have family residing in the area
or because they want a country dacha.

This tells us several things. First of all, it's a sign that
there is a lot of new disposable income in this country. It also
shows that Azerbaijanis have enough confidence in the economy
to put their money in non-liquid assets.

It also shows that by building something large, people are no
longer afraid to call attention to themselves. They are confident
that the authorities are not going to take their property away.
It also indicates that there is money outside of Baku, although
some of it might be from Baku residents who are investing and
building outside the capital. In any case, the benefits of economic
development are gradually beginning to spread and manifest themselves.

Oil Revenues
It's extremely dangerous for any country to completely rely on
a single product for the development of its economy- especially oil and
gas. To do so virtually guarantees that nation's eventual economic
collapse. Just look at countries that became rich petrol states
in the 1970s: Nigeria, Venezuela, Algeria, Iran, Angola, and
even more recently, Indonesia.

When a small percentage of the population has a great deal more
money than the majority, their demand for goods pushes the prices
up. The majority can't keep up with inflation and can't afford
the things that they need: food, gasoline, cars, spare parts,
clothes, all kinds of things. They suffer.

It's not just oil. Just take a look at the economy of Imperial
Spain in the 1500s and 1600s, when it was conquering the New
World and bringing large amounts of gold and silver back to Spain.
The economy of Spain inflated to an extraordinary extent on the
basis of this influx of gold and silver. Many Spanish artisans
and workers had to go to other parts of Europe to work because
they could no longer afford to live in Spain. Eventually, the
Spanish citizens drowned in their gold, just as the petrol states
of the 1970s drowned in their oil. And Azerbaijan must not do
that.

Norway is the only country that seems to have escaped this problem.
First of all, the Norwegians already had a vibrant non-energy
sector before oil was discovered, which they made even stronger
so that they would have an offset to the oil income and maintain
a more balanced economy. Second, they created an Offshore Oil
Fund, which enabled them to bring the oil money into the country
only as fast as the economy could absorb it.

You can't simply take oil money and bury it in the ground or
put in under a mattress. You must take it and invest it in safe,
secure investments outside of the country. Kuwait, for example,
has made more money from its offshore investments than it has
from the sale of its oil virtually every year since the mid-1980s.

Preparing for the
Future
Azerbaijan is aware of the risk of being inundated with oil money
and knows that it can't be dependent on only one product. The
government here understands this phenomenon and knows that it
needs to prevent the oil money from inflating the economy. The
Azerbaijani leaders have consulted with the Norwegians and others
and have attended international conferences seeking solutions
to this problem.

The fact that they have created an Oil Fund is an indication
that they know perfectly well what the risks are. They also understand
the need for the creation of a non-energy sector, which hopefully
will be strong enough to deal with the oil money when it arrives,
or even to function if there is no oil.

It will be a few years yet before we find out if this government
will succeed in insulating the country's economy from the pernicious
effects of oil money and use the money to develop projects that
bring it along at just the right pace. It's a very thin, fine
line and not easy to do.

It's very tempting for any government to want to respond immediately
and fully to the needs of its people when it has the capacity
to do so. When a government looks out and sees that its people
need new roads, more electricity, better healthcare, improved
education, cheaper food, and it has the ability to provide many
of these things, the temptation will be to do so.

But in a developing country that's becoming more democratic and
just beginning to develop a real free market-based non-energy
sector, you can't just spread the money around willy-nilly. You
need a strategy. You need to understand where you're putting
the money, what its impact will be, how it will be absorbed,
how the people will benefit and what the economic consequences
will be.

This is difficult because it often means telling the people:
"Yes, we could help you now, but it's better for the country
to wait until next year or the year after that." That means
the people won't always have what they need right away. But if
the government doesn't plan wisely and doesn't introduce money
in at the pace and in the areas where it can best be supported
by the rest of the economy, the long-term effects can be detrimental.

Not everyone will benefit from the oil immediately. Not until
2005 or so will the first large returns of oil development begin.
And it will take several years after that before the people benefit
in a significant way.

A Long Wait
Ideally, as Azerbaijan's investor-friendly climate develops,
more money will be coming here and there will be the creation
of new wealth, the resurrection of many types of industry and
the development of a service economy. This has enormous benefits
in terms of employment and higher standards of living for many
Azerbaijanis. A lot of these people will themselves become entrepreneurs
and start their own companies. Such is the beginning of an indigenous
middle class.

In the meantime, it's difficult to tell the young people: "Listen,
I know that you don't have enough now. And I know that you can
see that some are benefiting and you aren't. But the only thing
you can do is wait and study and prepare yourself for opportunities
that will come. But it will take a few years. You may suffer
during these few years, but compare yourselves to others in the
former Soviet Union who don't have this kind of opportunity."

There are other former Soviet countries that are in great economic
difficulty and have little hope. All they see is more of a long
road, which is as bleak as the section of the road they're standing
on right now. Numerous countries don't enjoy the same sort of
stability that Azerbaijan does. Nor do they have the same prospects
for economic development.

This country has both stability and good prospects. If its people,
who are very clever, will look to the future and analyze the
opportunities and prepare themselves to take advantage of them
when they come, they'll benefit greatly.

I see several positive trends continuing that had already come
into existence when I was here as Ambassador- changes that have been underway for
some time. If they continue in this direction, there will be
a certain self-perpetuating momentum, which over time will ensure
the development and expansion of an indigenous middle class via
a more investor-friendly climate in the non-energy sector in
Azerbaijan.

For example, the manufacturing of oil-related equipment could
be resurrected. During the Soviet period, Azerbaijan produced
nearly 80 percent of all oil-related equipment in the entire
Soviet Union. The factories in Sumgayit (north of Baku) and elsewhere
in the country are still there, although many of them have deteriorated.

But more importantly, the knowledge base is still here. The same
people who worked at those factories are still in their prime;
they are trained and experienced. And with additional training
and the import of modern equipment, these very same workers could,
very inexpensively, produce simple items like sucker rods (a
device used in the drilling of oil wells), simple valves, pipe
or other products that are not very high-tech.

As they begin to produce these items to international specifications,
such as those of API (American Petroleum Institute), they would
be able to compete very successfully with international producers
of the same things. Their largest market would be here in the
Caspian basin, because the labor and transportation costs would
be much lower. But ultimately, Azerbaijan could become a major
exporter of oil-related equipment.

Regional Stability
I believe that Azerbaijan will be the economic engine for the
development of the three Caucasus countries. First will come
Azerbaijan, and then because of the enmity between Azerbaijan
and Armenia and the agreement already signed related to oil and
gas routes, Georgia will be second. Armenia will be last.

Georgia has very few natural economic resources. Its internal
political situation is even worse than Armenia's. If Armenia
is to survive, it must partner with Azerbaijan to benefit from
regional development schemes.

Nor are such strategies going to be funded entirely from abroad.
The nations of the Caucasus will have to help pay their own way.
The basic economic development costs will be borne in part by
foreign investors and, in part, by investments from money generated
in Azerbaijan. But if Azerbaijan does not succeed, Armenia will
fail completely. Regional stability is likely to follow, rather
than precede,
Azerbaijan's development. It has to be difficult for the Armenians
to internalize this reality.

Azerbaijan can prosper, maintain stability, become wealthy and
benefit from its oil money even without the return of Nagorno-Karabakh
or its additional occupied territory. It would be a great shame
if such were to happen because it would preclude Armenian participation
in regional development fueled by Azerbaijan. But such a scenario
could occur.

Armenia, on the other hand, cannot develop unless it cooperates
with Azerbaijan. Armenia has very few natural resources. Half
of its population has already left the country since independence
[1991]. Although the Armenian Diaspora has worked hard and enjoys
economic and political success in the West, they lack the collective
resources to enable the Armenian nation to develop on its own.
Armenia enjoys enormous amounts of foreign aid per capita, but
countries don't develop on the basis of foreign aid. They develop
on the basis of hard work. If Armenia is to survive, it will
have to do so on the coattails of development related to Azerbaijan.

Azerbaijani Identity
With the exception of that one brief, flickering moment of independence
between 1918 and 1920, Azerbaijanis have always been forced to
see themselves as an extension of somebody else. That was certainly
true during the Cold War and the period of Soviet domination
[1920-1991].

Having served as U.S. Ambassador in Uzbekistan and Tajikistan
before coming to Azerbaijan, I thought there would be many more
similarities between these countries than I found. I thought
the languages, the culture and attitudes of the people would
be more alike, especially between Uzbekistan and Azerbaijan.
But Azerbaijan is very much its own country, even though it is
located at a crossroads. In Azerbaijan, you sense a great respect
for ancient Persian poets. At the same time, the Shiite Islam
has had a different impact than it has in Iran. Turkic influence
is widespread, particularly from the Western Ottoman Turks, not
so much the Eastern Turkic groups like the Uzbeks. It was the
Ottoman Turks who controlled the area during the wars between
the Persians and the Turks. The impact of the Russian influence,
of course, is still very strong.

You see all of these influences mixed together in one very spicy
and wholesome stew in which the basic stock is fundamentally
Azerbaijani. The resulting melting pot is neither Persian, nor
Turkic, nor Russian, but Azerbaijani at its core.

The Azerbaijani people are by nature very warm and hospitable
and welcoming of foreigners. They have benefited by the diversity
of nations and cultures that have passed through their territory.
They have suffered as well from the domination of races like
the Albans, the Arabs, the Persians, the Turks of various descriptions,
the Mongols and most recently, the Russians. But through the
centuries, they have basically kept their Azerbaijani-ness. I
think only just now have they been given an opportunity to truly
express themselves.

Now that the country has an opportunity to be what it really
is, and can do so openly, you are beginning to see a welling
up of Azerbaijani culture and a growing awareness of the richness
of that culture by others, even outside of the country itself.
I think it's a very impressive cultural accomplishment and something
that Azerbaijan as a nation should be extremely proud of.

Being an ambassador is definitely a learning experience. You
don't come to a country knowing everything about it. You try
to learn from your studies and briefings. You read back files,
you read books and articles. You talk to people who know the
country. But to truly understand any country, you have to live
there and let the reality of that country penetrate your pores.
And as that begins to happen- and it's not an instant process- you then begin to
have the depth of understanding and perception that you need
as an ambassador. While I was Ambassador in Azerbaijan, I discovered
so much that's admirable about the Azerbaijani character.

Azerbaijanis have succeeded in keeping their identity throughout
these centuries. You see people who are very much interested
in economics and culture, but less interested in conflict. There
are people who believe in getting along with their neighbors,
but at the same time they're prepared to stand up for themselves
if it is necessary. Modern-day Azerbaijanis have a greater sense
of realism about their position in the world, about their relationship
to the West. They realize the need for change, within certain
limits, if they are to be successful in the emerging modern world.
This is what I think tipped the scales, more than anything else,
and led me back to Azerbaijan.

This country is not going to suddenly cease being Azerbaijan
and try to become Europe or America. Azerbaijanis are always
going to pick and choose what they feel is best for them. They
will not try to emulate some other culture, and that's exactly
as it should be.

Stanley Escudero,
former American Ambassador to Azerbaijan, was interviewed by
AI Editor Betty Blair in Baku in June 2001.